Economics for Leaders Lesson 1: Scarcity & Economic Growth

Economics for Leaders Hypothesis for the Week: Human prosperity and social cooperation develop spontaneously in societies that protect private property rights and encourage voluntary trade.

Economics for Leaders Economic Reasoning Propositions #1: People choose, and individual choices are the source of social outcomes. Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives. #2: Choices impose costs; people receive benefits and incur costs when they make decisions. The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up. #3: People respond to incentives in predictable ways. Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways. #4: Institutions are the “rules of the game” that influence choices. Laws, customs, moral principles, superstitions, and cultural values influence people’s choices. These basic institutions controlling behavior set out and establish the incentive structure and the basic design of the economic system. #5: Understanding based on knowledge and evidence imparts value to opinions. Opinions matter and are of equal value at the ballot box. But on matters of rational deliberation the value of an opinion is determined by the knowledge and evidence on which it is based. Statements of opinion should initiate the quest for economic understanding, not end it

Economics for Leaders ERP-5: Understanding based on knowledge and evidence imparts value to opinions. Opinions matter and are of equal value at the ballot box. But on matters of rational deliberation the value of an opinion is determined by the knowledge and evidence on which it is based. Statements of opinion should initiate the quest for economic understanding, not end it. Economic Reasoning Principle #5: Understanding based on knowledge and evidence imparts value to opinions.

Economics for Leaders The Lamp

Economics for Leaders Why Can’t You Have It All? SCARCITY: the FACT that resources are limited and human wants and needs are unlimited Not enough to go around!

Economics for Leaders Economic Reasoning Principle #1: People choose, and individual choices are the source of social outcomes. Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives.

Economics for Leaders Scarcity Isn’t Optional Fact: Resources ARE limited  Land (57,506,000 sq mi. & not even all habitable!)  Labor (6,7 bil. souls x 24 hrs a day)  Capital (less than ∞, trust me)  Entrepreneurship (not everybody is Bill Gates) Fact: Human desires are boundless

Economics for Leaders Are YOU Never Satisfied ? – It’s not just you out there

Economics for Leaders Scarcity Economics is: a study of choice  Choice

Economics for Leaders Key Economic Proposition Scarcity necessitates choice – people must choose

Economics for Leaders Scarcity  Choice

Economics for Leaders Key Economic Proposition Scarcity necessitates choice – people choose & – choices determine social outcomes

Economics for Leaders Wealth and Poverty And the outcomes are noticeably different …

Economics for Leaders

Understanding Wealth & Poverty

Economics for Leaders Quiz … Who is this person? What was the title of the book he wrote in 1776? – An Inquiry into the Nature and Causes of the Wealth of Nations Adam Smith

Economics for Leaders During This Week, We Will Conduct … An Inquiry into the Nature and Causes of The Wealth of Nations

Economics for Leaders Poverty in the World… GDP per capita (ppp) Rwanda $1282

Economics for Leaders The Rest of the Story... GDP per capita (ppp 2012 US Dollars) Malawi$ 893 Rwanda $ 1282 Uzbekistan$ 3287 Indonesia$ 4636 Ecuador$ 8669 World average$12,200 Mexico$ 16,588 United States$ 48,112

Economics for Leaders The Elusive Quest for Growth I do not see how one can look at figures like these without seeing them as possibilities… Is there some action a government … could take that would lead the … economy to grow … ? If so, what exactly?

Economics for Leaders The consequences for human welfare …are simply staggering: Once one starts to think about them, it is hard to think about anything else. –Robert Lucas, University of Chicago »Nobel Laureate, 1995 »July, 1988

Economics for Leaders

Why Should We Care?

Economics for Leaders Why are some countries rich and others poor? Low, Middle and High Income Economic reasoning tools can help us answer this and other questions about world poverty

Economics for Leaders How Will Tom Hanks Survive? He must produce! What? What he wants - – Food – Shelter

Economics for Leaders Dealing with Scarcity We must produce things that we want – that is, – goods and services that we value

Economics for Leaders Economic Growth If we can increase what we produce per person Then our standard of living rises over time – even in the face of scarcity We refer to this as “economic growth” – Often measured by GDP = gross domestic product GDP = sum value of all produced in economy in a year

Economics for Leaders ~1750 Population Growth and Important World Events

Economics for Leaders

Sources of Economic Growth Perspiration Longer work day Higher labor force participation rate Inspiration Improve worker …

Economics for Leaders “Productivity” Our nation’s standard of living depends on it!

Economics for Leaders Importance of Productivity A engineer who, while visiting China, came across a large crew of men building a dam with picks and shovels. When the engineer pointed out to the supervisor that the job could be completed in a few days, rather than many months, if the men were given motorized earthmoving equipment, the supervisor replied:... such equipment would destroy many jobs.

Economics for Leaders The Real Source of Wealth? Oh, the engineer responded, – “I thought you were interested in building a dam. – If it’s more jobs you want, why don’t you have your men use spoons instead of shovels.” Moral: – Purpose of economic activity produce as much VALUE as possible with scarce resources.

Economics for Leaders Economic Growth improves the lives of the poor by making the pie bigger Bigger “slices” mean higher standards of living

Economics for Leaders The Secret to Economic Growth: Productivity The output produced from a given set of resources in a given period of time. Increasing productivity means that greater output is produced from a given set of resources in a given period of time. Hans Rosling and the Magic Washing Machine

Economics for Leaders Farming Productivity Then and Now…

Economics for Leaders Key to Productivity: Institutions the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. Institutions in your life:

Economics for Leaders What are the “rules of the game” (the accepted and expected forms of social interaction) in: Dating ?

Economics for Leaders Institutions Matter: Property rights The rule of law Open markets Entrepreneurship and innovation

Economics for Leaders Institutions Shape Incentives The reward or penalties that influence people’s choices and behavior.

Economics for Leaders The “Big Ideas” from Lesson 1: 1.Scarcity forces us to choose among alternatives 2.Economic growth gives us more to choose from and raises standards of living by: – reducing infant mortality, – Increasing life expectancy, – reducing hunger, – improving environmental quality, and – reducing the incidence of debilitating diseases.

Economics for Leaders The “Big Ideas” from Lesson 1: 3.Some institutions and institutional arrangements encourage economic growth and some do not. 4.The institutions that foster growth and economic development include: Open markets Property rights and the rule of law Entrepreneurship and innovation